The California Public Utility Commission (CPUC) still intends topress FERC for a finding of affiliate abuse and tariff violationsin the El Paso Natural Gas pipeline case, said CPUC Attorney HarveyMorris (see Daily GPI, Feb. 28), despite El Paso Merchant Energy’sdecision to turn back on May 31 most of the 1.2 Bcf/d of firm spaceit has held on its affiliated pipeline system.

“There still can be penalties found for affiliate abuse,” hesaid in an interview with Daily GPI. “PG&E has filed pleadingssuggesting that because this [El Paso agreement with its marketingaffiliate] should have been a Section 4 filing all along, and ElPaso violated its tariff, they should disgorge any profits.”

In December, El Paso Merchant, responding to an emergency motionfrom Southern California Edison, said that it was using as muchcapacity as it could to the California border because it hadexercised an option under a contract with its affiliated pipeline.The option, it said, allowed it under maximum rates to obtainprimary receipt points in the Permian Basin to buy gas and sell itat the California border, Morris explained.

“There is a live issue right now about whether they really hadviolated their tariff all along by not filing a Section 4,” hesaid. “Their story had always been that they never had to file aSection 4 because there were no [special terms to their $38 millioncontract with their marketing affiliate]. Well, we learned therewas a deviation [from their pro-forma agreement].

“What’s significant is if they violated their tariff, we can getretroactive relief,” said Morris. “The affiliate abuse issue alsocould result in penalties, and that’s still a live issue.”

In a recent answer to CPUC comments, El Paso continued to defenditself against the long standing charges of market manipulationthrough pipeline capacity “hoarding” by its marketing affiliate. Italso redirected the blame for the high California prices and basisblowout on state regulators and utilities.

The case [RP00-241] has been pending at the Commission fornearly a year. The CPUC has always charged that putting so much thecapacity in the hands of a marketing affiliate creates an incentivefor the pipeline to not sell interruptible transportation in orderto drive up the cost of capacity and maximize its affiliate’sprofits.

El Paso said its conscience is clear, however. There’s nodenying that a scarcity of pipeline capacity has developed intoCalifornia, the company told FERC. But, contrary to the accusationsof state regulators, Southern California Edison and PG&E Corp.,the capacity agreement with Merchant Energy had nothing to do withit.

El Paso said its accusers would be more accurate pointing thefinger at themselves for the current market situation. They are theones who neglected in-state pipeline construction and turned backmore than 1.7 Bcf/d of firm capacity on El Paso in the 1990s. Theysimply ignored the fact that demand growth in the state surpassedavailable capacity on both the interstate and intrastate systems,the pipeline said.

“A brief review of the four delivery points on El Paso’s systemat the California-Arizona border — SoCal-Topock, Mojave-Topock,PG&E-Topock and Ehrenberg — shows that El Paso is bumping upagainst its interconnect capabilities,” El Paso said (see DailyGPI, March 7). There is a significant lack of capacity downstreamof those delivery points, as the Energy Information Administrationand FERC’s own staff noted recently.

But how can prices be so high and how can there be a capacityshortage when the existing pipelines to Northern California aren’teven full? Morris asked.

“There’s market manipulation going on. It’s not just the law ofsupply and demand. While there might have been constraints intoSoCal’s system this winter at various times, there was not aconstraint at Ehrenberg in Southern California this past summer.”Even prior to the El Paso explosion, the basis differential greatlyexceeded the maximum transportation rate on El Paso, he noted.

“That shows you something was wrong with the marketfundamentals. This winter demand was that much more, and things gotworse, but it still doesn’t explain Northern California where therewere no capacity constraints on El Paso or anywhere, and yet thebasis differential greatly exceeded the maximum regulatedinterstate charge.”

El Paso, however, noted that Merchant Energy could not hoardpipeline capacity to drive up prices because of FERC regulationsgoverning interruptible transportation. “Assuming capacity isavailable for [interruptible] service, El Paso is required totransport gas for any party willing to pay the Commission-approvedfull [just and reasonable] rate.”

According to Morris, though, the pipeline was not selling IT toNorthern California despite the availability of capacity and thedemand for it.

“We have some questions in our mind right now why El Paso thiswinter didn’t have interruptible transportation available toNorthern California,” he said. “It would have put downward pressureon the California border prices, so we understand why they hadincentive not to. From what we understand, PG&E tried to getsome interruptible transportation this winter and couldn’t, andPG&E operates the interconnecting point at PG&E-Topock withEl Paso. They know there was slack capacity on both sides of theborder, but they couldn’t get any interruptible transportation.”

Morris said the so called constraint on PG&E’s side of theborder at PG&E-Topock only occurs when Transwestern is runningfull there at 300 MMcf/d and El Paso is delivering more than 840MMcf/d. PG&E’s takeaway capacity is 1,140 MMcf/d on Line 300.

“PG&E’s Line 300 had spare takeaway capacity all winterlong,” said Morris, adding that El Paso should have been selling ITif Merchant Energy wasn’t fully using its contracted space. “ITwould have been at the maximum rate, but that’s still a heck of lotbetter at the California border than what the border prices havebeen, which is way higher than the maximum transportation rate plusthe producing basin prices.”

The CPUC is pleased El Paso Merchant relinquished a large partof its capacity holdings on its affiliated pipeline, but anycapacity held by a marketing affiliate is too much for Californiaregulators, said Morris.

El Paso Merchant was awarded 270 MMcf/d during the recent openseason, but it also picked up 156 MMcf/d of long-term capacityreleased by SoCal Gas through 2006. Morris believes even 400 MMcf/dprovides cost incentives for the pipeline to play games withinterruptible transportation rather than operate efficiently.”We’re still in conflict-of-interest land,” he said.

“I can’t share with you stuff that we filed under seal at FERC,but if they will release some of these documents, I will be happyto refute their claims of who is at fault for [soaring prices].”

On Feb. 23, FERC issued a data request to El Paso Merchantasking for its derivative arrangements involving supply andtransportation capacity on El Paso Natural Gas. It also ordered themarketer to send those details to the intervenors in the case. ElPaso Merchant still has not done that (see Daily GPI, Jan. 11).

©Copyright 2001 Intelligence Press Inc. All rights reserved. Thepreceding news report may not be republished or redistributed, inwhole or in part, in any form, without prior written consent ofIntelligence Press, Inc.